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Let's talk about why technical analysis works, and it works very, very well.
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Most of the time, but not every time.
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And so we'll get into that a little bit and kind of the underlying concepts around technical analysis
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when you're looking at a security and a lot of it gets back to the whole idea of supply and demand,
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right?
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If you have a lot of demand for something, the prices will will rise up.
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You know, if somebody really wants a whole bunch of people are buying a certain product, for example,
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you know, the person who sells that product could raise the price.
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Same thing with trading of a security.
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If there's a lot of demand for security, the price will rise.
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And so what this leads with the supply and demand, it leads to predictable behaviors.
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We start seeing certain patterns or certain things happening.
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We can anticipate that there's going to be changes or things that are going to happen as a result of
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that supply and demand.
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And it's been around a long time.
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I mean, it's been around since like the first time was ever talked about.
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In the book I read was the, you know, 1948, you know, so it's not something that's like just brand
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new that's never been really proven or tested.
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It's been, you know, used for a very long time.
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In fact, you know, some things like candlestick price patterns and all have gone way back the one
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hundreds and hundreds of years back in Japan.
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But certainly the current technical analysis, certainly since 1948 and many different things around
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that and proving why that works, but not all the time.
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So let's talk about what's the idea behind this?
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And one way to think about it is how, you know, people will travel together or people will invest
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together, or traders will get an idea and they'll kind of start moving together, right?
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And that's kind of what we think about as trends.
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I think we're all kind of moving the same direction.
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It's almost like a like a herd mentality, right?
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OK, so I'm not going to say that people are like sheep, OK?
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People are not sheep, OK?
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But it's the idea of of a number of people or animals traveling together, going in the same direction,
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you know?
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So like if you look at this picture, for example, you could see that these sheep are traveling in
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a certain direction, right?
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They're headed downhill on a road in nice and easy for them to, you know, walk down the road and they're
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all kind of heading in that same direction, for the most part.
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You can even consider that momentum investing right tire momentum, momentum indicators where they're
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all kind of headed in this easy trend going down the down the road.
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But you might also notice something that's going on.
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It's a little different in the upper left.
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You know, you see the little grass there.
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In the left, there's a few sheep who went on the grass that, hey, this looks pretty good over here.
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Let's go over here and have some grass.
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Now they're not following the trend.
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Like if we were investors, we might say that this is a definite downward trend, right?
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Look at how everything's kind of moving down the hill.
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It's easy to move down the hill, but we'd want to watch what's going on in the hill over there, because
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that might be what we would call a technical analysis, a breakout or a changing of the trend.
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And this is going to be a real breakout.
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It's going to change the trend.
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Are the sheep going to change the direction and now go to the hill?
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So if we think of this as terms of a security, let's say prices have been falling going down the hill,
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but now something's happening, something in the news or people are just for whatever reason, are changing
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that supply and demand.
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And they're going to now go on the hill and the prices are going to start to rise.
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So if we have an indicator that says, Oh, you know, when certain things happen, people are going
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to start change, their prices are going to start rising.
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Kind of the idea of just like we see enough sheep that go up on the hill, the sheep will change direction
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too.
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So maybe it's a break up, maybe a trend is forming.
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Maybe it's just a retracement, which is another term for a just a temporary move or kind of goes up
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for a little bit, then comes back right away.
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It's a temporary move, so we're going to learn all about that.
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So that's the underlying idea why and why it works because looking at these big kind of macro type trends
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now doesn't work every time because one, nothing's 100 percent perfect, of course.
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And then there's unexpected random events that can occur, and these random events could come at a company
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level.
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Let's say the CEO unexpectedly dies or gets fired or something happens.
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You know, there's something that can happen at a company level or they miss an earnings announcement
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unexpectedly can drive prices up and down.
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But the things that can happen at real big country or global levels to that are really beyond our control
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and even beyond our analysis, because something really unexpected happens.
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I mean, if we think about something that was really a big, unexpected thing or had but certainly a
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shock to all the security markets for a time being was like COVID 19.
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Remember back twenty twenty, you know, we had COVID 19, and if we look at this chart here, even
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go on the left.
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This represents prices.
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Amazon's in the blue for Amazon as a stock.
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And then they've got we've got on here, Norwegian Cruise Lines, right?
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So cruise ship and we've got the S&P 500 like 500 large U.S. stocks to just compare them.
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If you look to the left, you can see how the lines are together and how this represents prices.
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And so they're all kind of trending together as far as the prices.
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And then in February and March becomes known that COVID is really going to be a problem, becomes a
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global pandemic and gets announced that when governments start talking about it in that way, so it
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sends all of the prices down, no matter how good a stock is or how good a security is, it sends all
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of everything down because there's this big, unexpected event.
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Now, once the event happens, then things change or can change.
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You can see where people look on Amazon and say, Well, wait a minute.
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In a pandemic where we can't get out and we're locked down and we need goods supplied to us that to
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our home, maybe right directly to our door.
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Where are you going to buy from Amazon?
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This is good for Amazon.
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And as you can see, Amazon's price took off for the rest of the year.
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From that, S&P 500 rebounded a little bit, too, and we came in actually first year up a little bit.
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But if you look at Norwegian Cruise Line, they went way down and hadn't recovered, at least here in
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the year of 2020.
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A little bit of recovery, but not a lot, because again, this unexpected event had a bigger impact
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on them.
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I mean, who wants to be on a cruise line when you've got a pandemic?
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And remember the early stories about COVID 19?
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It was people trapped on cruise ships and they couldn't get home.
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And COVID was raging.
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So you can see the impact that this unexpected event happens.
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So sometimes it happens and you're going to learn about how we're going to put in built in, you know,
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protections and things like that to, you know, limit our losses like stop loss orders and things are
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going to learn about and how we can recognize these trends so we can get out quickly to its technical
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analysis about buying at the right time, but also selling at the right time and avoiding big losses
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like that.
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So again, nothing is 100 percent foolproof, but having an exit strategy really helps.
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If you had no exit strategy and Norwegian Cruise Line, you rode that way down like I think was down
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70 percent or something like that.
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And if you're like, say, a buy and hold investor, which is different than trading and more and certainly
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different the technical training, you know, you can suffer through that and then you just don't get
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out.
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You don't get out to you try to ride out the storm.
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Now you see Norwegian go down.
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So far, it's going to take a longer time to ride out that storm than, let's say, Amazon would.
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So but with technical trading ideas that I'm actually an active trader around that.
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So another thing with technical analysis, too, is it doesn't tell you how much to invest.
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It tells you and with indicators and things, whether you should invest and how.
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But it doesn't tell you how much.
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We'll talk a little bit about some money investment strategies at the very end of the course to help
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you with that.
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But the actual indicators and things don't tell you like or if I see this price bar or I see this moving
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average goal like this, I should invest x number of whatever of my money.
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It doesn't tell you that just tells you what's happening and then you decide what action you want to
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take on that.
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So technical analysis is terrific.
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Been around a long time works, but not perfect.
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You know, nothing's perfect, right?
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